November 25, 2015

The Frontier

A war of words is unfolding in our profession.

In case you’ve not followed, it’s about the market for the product you manage as investor-relations officers. Many of you have read Flash Boys, Michael Lewis’s (The Big Short is soon coming to movie screens) engaging story of high-speed trading in equities. IEX, the upstart Lewis profiles, aims now to become a stock exchange, listing and trading your shares. Its application is up for public comment.

The dirt’s flying. IEX is accused by establishment exchanges of operating an unfair structure. The broker earned its stripes by offering investors a transparent alternative trading system characterized by the Magic Shoe Box – a fiber optic coil standardizing access to prices. You ought to read what’s been said and how IEX is responding.  We suspect its future fellows may regret having hurled recriminations. Seriously. See the comment letters from foes and friends (Southeastern Management’s supportive letter, signed by fellow investment managers in Declaration of Independence fashion, is a must-read. We’re finalizing ours now.).

Why care from the IR chair? Can your CFO explain to the Board how the company’s shares trade?  Public companies have left responsibility for the market to somebody else. The small city of Bell, CA followed this strategy and later found its managers were paying themselves a million dollars. Do you know what your exchange sells?

We’re picking no fights with the Big Two though you regular readers know we’re critical of their arbitrage incentives, how exchange revenue-drivers shift focus from investment to setting prices. When they match a baseline percentage of trades in your shares (and quote best prices often enough), then under the rules of the Consolidated Tape Association, exchanges receive the lion’s share of market-data revenues from the national system tracking prices and volumes. I think the establishment simply resists sharing with IEX a piece of this pie (how about growing the pie bigger?).

By setting prices continuously the exchanges create additional proprietary data that they sell back to traders and market centers. Why do they buy it?  Any participant serving customers must offer best prices and to ensure that they do, rules say they must buy all the data. Fee schedules for the exchanges show data-feeds can cost vast sums.

Yet in a perverse irony that cannot be blamed solely on the exchanges, traders with no customers often set most prices. These firms are the high-frequency traders about which Flash Boys unfolds its racy narrative.

IEX won’t be paying fast traders to set prices. It’s got a straightforward approach to matching customers. Read the comments on both sides and send a couple along to your executives. Ultimately the equity market exists for you, public companies, and your active investors, not so traders can arbitrage some split-second spread. We should then ask why legacy exchanges are paying for split-second prices.

We admire our friends at IEX and want them to succeed. Where companies once listed on many exchanges – Pacific, Boston, Philadelphia, Chicago, Cincinnati and other markets – the choices today are Either Or.  BATS has no current plans for listings beyond ETFs so it’s a duopoly. Our profession should welcome a fresh third option.

As the tryptophan turkey high tomorrow washes by and you give thanks (in the USA we worship turkey on the 4th Thursday of November, international readers), be glad about the ever-present opportunity for say on market structure, about which issuers are notoriously silent. Resolve to be louder.  Go forth boldly and lay claim to the frontier.

Share this article:
Facebook
Twitter
LinkedIn

More posts

Warning: Undefined array key "show_categories_filter" in /home/modernir/public_html/wp-content/plugins/elementor/includes/conditions.php on line 87 Warning: Undefined array key "show_categories_filter_tablet" in /home/modernir/public_html/wp-content/plugins/elementor/includes/conditions.php on line 87 Warning: Undefined array key "show_categories_filter" in /home/modernir/public_html/wp-content/plugins/elementor/includes/conditions.php on line 87 Warning: Undefined array key "show_categories_filter_tablet" in /home/modernir/public_html/wp-content/plugins/elementor/includes/conditions.php on line 87 Warning: Undefined array key "allow_filter_navigation_by_url" in /home/modernir/public_html/wp-content/themes/dt-the7/inc/mods/compatibility/elementor/widgets/posts-loop.php on line 1417
dreamstime m 51496066
November 6, 2024

We’re back! Karen and I left for Spain last month, where outside Girona I rode bikes with good friend Brent and our pro-cyclist guide, Arno. ...

dreamstime m 112105689
October 16, 2024

Options expire and renew starting today and running through Tuesday, the last chance for big hedges and bets on the US presidential election.  We could...

dreamstime m 183242520
October 9, 2024

Forbes Magazine wrote in Feb 2009 that Warren Buffett is said to have observed, “You pay a very high price in the stock market for...

Autumn colors on Buffalo Pass, Steamboat Springs CO.
October 2, 2024

On Buffalo Pass, autumn blazes.  In fact, there are a lot of things ablaze, with another earnings season looming. Will you report results the same...

dreamstime m 272701804
September 25, 2024

Tundra is spongy. So are stocks. Somebody facile with words is Peter Heller.  Karen and I met him at a book-signing in Steamboat Springs. Things...

dreamstime m 330872328
September 18, 2024

Stocks are up. So are the number of trades and the amount of volume that’s short. But trade-size has plunged. The stock market is up...